Beating or Meeting Earnings-Based Target Performance in CEOs' Annual Cash Bonuses

Simon S. M. Yang
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Simon S. M. Yang: Adelphi University, USA

Chapter 12 in Advances in Quantitative Analysis of Finance and Accounting, 2006, pp 271-298 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractPrior studies show that the compensation committee often uses pre-specified target performance in CEOs' cash bonus plans to evaluate executives' ability to achieve the expected performance. Executives may face different incentive outcomes when they fall short of, meet, or beat the target performance. This paper examines whether the compensation committee places more weight on beating target performance than meeting target performance in contracting CEOs' cash bonuses. Specifically, three alternative measures are used, namely, permanent earnings, consensus of analysts' forecasts and average earnings growth as a proxy for target performance. It is found that the compensation committee seems to place more contract value on above-target than on-target performance. Result also shows that permanent earnings seem to be the strongest proxy that can be used to approximate target performance.

Keywords: Earnings Management; Management Compensation; Option Theory and Application; Debt Management and Interest Rate Theory; Portfolio Diversification; Earnings Surprise (search for similar items in EconPapers)
Date: 2006
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